According to a recent article in Bloomberg, various asset classes have been 90% correlated to the upside over the past 8 month rally, the highest such correlation of the past 50 years. In other words, the global carry trade is back with a vengeance. Only this time the primary funding currency is the U.S. dollar (i.e., the speculators are short the buck).
These tight correlations blew apart on Friday as the dollar and stocks rallied on a better-than-expected employment report while gold tanked $60/oz. and bonds sold off. Will “good” economic news unwittingly prick the carry trade bubble and provide the gravitation pull that pancakes these assets in concert? We suspect so. We also suspect that gold will at least hold up better than equities.
Three months ago the Gold/S&P 500 ratio bottomed at 0.93. By last Thursday this ratio had rallied to 1.10. Today it stands at 1.03 (1143.50 per oz. gold/1108 on the S&P). This ratio peaked at nearly 6x during the gold bubble of early 1980 and troughed at 0.20 in 2000-2001. With the monetary authorities hell bent on destroying the economy and ultimately the currency, a ratio of 2, 3, or 4x is not outside of the realm of possibilities.